Investors don't embrace Alcoa's plan for splitting company, debt
June 29, 2016 10:03 PM
Gene J. Puskar/Associated Press
Alcoa plans to break into two companies: an upstream, commodity business that mines bauxite, produces alumina and aluminum, and manufactures aluminum sheet used in beverage cans; and a downstream business that makes higher-margin aluminum and titanium products for the aerospace, automotive and other markets.
By Len Boselovic / Pittsburgh Post-Gazette
Investors gave a tepid welcome Wednesday to Alcoa’s plans for splitting the metals producer into two companies, sending the stock lower after Alcoa disclosed new details about how the separation will be engineered.
Alcoa announced plans in September to break into two companies: an upstream, commodity business that mines bauxite, refines alumina and makes aluminum from it, and manufactures aluminum sheet used in beverage cans; and a downstream business that makes higher-margin aluminum and titanium products for the aerospace, automotive and other markets.
The initiative is intended to lift the value of Alcoa’s lackluster stock by segregating the upstream business, plagued by low commodities prices, from the more promising downstream businesses.
The company disclosed Wednesday that the downstream business, to be named Arconic, will take on all the debt of the current company. The upstream business, which will retain the Alcoa name, will raise about $1 billion in debt and give the proceeds to Arconic, which will use some of it to pay down the debt it assumed as part of the split, according to plans Alcoa filed with the U.S. Securities and Exchange Commission.
That $1 billion “will scarcely move the needle on Arconic’s debt load,” Gimme Credit debt analyst Carol Levenson wrote in a note to clients.
Arconic also will retain a 19.9 percent stake in the new Alcoa. Arconic hopes to sell those shares once low aluminum prices return to more normal levels, the company told analysts and investors during a conference call Wednesday morning.
About $2.6 billion of Alcoa’s $5.6 billion in pension and retiree healthcare liabilities will be allocated to the new Alcoa while the remaining $3 billion will be transferred to Arconic.
“The upside of separating is not as much as we hoped,” said John Tumazos, an independent Holmdel, N.J. metals industry analyst.
He blamed depressed metal prices, the strong dollar, and a disappointing performance from Firth Rixson, a jet engine components manufacturer Alcoa acquired two years ago. The United Kingdom-based unit will become part of the Arconic business following the split.
Morningstar analyst Andrew Lane is not optimistic about prospects for the upstream business. He expects China’s overcapacity in the aluminum business will continue keeping a lid on prices. That could prevent Arconic from selling its stake in the upstream business within the 18-month time frame Alcoa is hoping for, Mr. Lane said.
He currently values Alcoa stock at $8 per share and does not expect the value of the two companies after the separation will be much different than that.
Alcoa Chairman and CEO Klaus Kleinfeld said efforts to thwart the separation by the company’s Australian-based joint venture partner won’t prevent Alcoa from completing the split later this year.
Alumina Ltd., which owns a 40 percent stake in a bauxite mining and alumina refining venture, alleges the breakup triggers a provision in the venture agreement that gives it first rights to acquire the venture’s assets. Alcoa went to court in May seeking to prevent Alumina from blocking the separation.
Mr. Kleinfeld told investors and analysts on the call that he is confident the court will rule in the company’s favor on an expedited basis.
“We are well on course to get [the separation] finalized in the second half of 2016,” he said.
Alcoa shares finished Wednesday at $9.10, down 23 cents. They are off 8 percent this year and nearly 5 percent since the split was announced Sept. 28.
Len Boselovic: email@example.com or 412-263-1941.
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